Partnership Accounts - jandkicai.orgPartnership Accounts 2 Goodwill Computation and Accounting . METHOD FOR GOODWILL VALUATION . There are four methods for valuation of goodwill

Partnership Accounts

Fundamentals Of Accounting

Fundamentals Of Accounting: Partnership Accounts

2

Goodwill

Computation and Accounting

METHOD FOR GOODWILL VALUATION

There are four methods for valuation of goodwill 1) Average profit basis, 2) Super profit basis, 3) Annuity basis, and 4) Capitalisation basis


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Illustration 1 Lee and Lawson are in equal partnership. They agreed to take Hicks as one-fourth partner. For this it was decided to find out the value of goodwill. M/s. Lee and Lawson earned profits during 2002-2005 as follows:

Year Profits (Rs.)

2002 2003 2004 2005

1,20,000 1,25,000 1,30,000 1,50,000


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Continued On 31.12.2005 capital employed by M/s. Lee and Lawson was Rs. 5,00,000. Rate of normal profit is 20%. Find out the value of goodwill following various methods. Solution

Year Profit Weight Rs.

Weighted Profit

Rs. 2002 1,20,000 1 1,20,000


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Method (1) : Average Profit 2003 2004 2005

1,25,000 1,30,000 1,50,000

2 3 4

10

2,50,000 3,90,000 6,00,000

13,60,000

Weighted Average Profit Rs. = 1,36,000 Assumption : Goodwill is valued at 3 year’s purchase Value of Goodwill : Rs. 1,36,000 x 3 = Rs. 4,08,000


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Method (2) : Super Profit Basis Average Profit Rs. 1,36,000 Less : Normal Profit 20% on Rs. 5,00,000 Rs. 1,00,000 Rs. 36,000 Assumption : Goodwill is valued at 3 years purchase. Value of Goodwill:Rs. 36,000 x 3 = Rs. 1,08,000


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Method (3) : Annuity Basis

Assumptions: (a) Interest rate is equivalent to normal profit

rate i.e. 20% p.a. (b) Goodwill is valued at 3 years purchases Valuation of Goodwill : Rs. 36,000 x 2.1065 = Rs. 75,834


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Normal Value of Capital employed : 1,36,000 x 100 20 = Rs. 6,80,000 Capital Employed in M/s. Lee and Lawson = Rs. 5,00,000 Goodwill = Rs. 1,80,000

Method (4) : Capitalisation Basis


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Illustration 2 The following particulars are available in

respect of the business carried on by Rathore

Rs. (1) Capital Invested 1,50,000 (2) Trading Results : 2002 Profit 40,000 2003 Profit 36,000


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Continued 2004 Loss 6,000 2005 Profit 50,000 (3) Market Rate of

Interest on investment 10% (4) Rate of risk return

on capital invested in business 2%

(5) Remuneration from alternative employment of the proprietor Rs. 6000

(if not engaged in business). per annum


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Continued

You are requested to compute the value of goodwill on the basis of 5 years’ purchase of super profit of the business calculated on the average profits of the last four years. Solution Average maintainable profits Rs. Trading profit during 2002 40,000 2003 36,000 2005 50,000


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Continued

1,26,000 Less: Loss during 2004 6,000 Total 1,20,000 Average Profits (Total ¼) 30,000 Less: Remuneration for the proprietor 6,000 Average maintainable Profit 24,000


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Continued

Normal Profit (12% on capital employed) 18,000 Super Profit 6,000 Goodwill at 5 year’s purchase of super Profit 30,000


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Example 1

A, B & C are in partnership sharing profits and losses in the ratio 2:2:1. They want to admit D into partnership with one-fifth share. D brings in Rs. 30,000 as capital and Rs. 10,000 as premium for goodwill. The necessary journal entry will be: Bank A/c Dr. Rs. 40,000 To A’s Capital A/c Rs. 4,000 To B’s Capital A/c Rs, 4,000


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Continued

To C’s Capital A/c Rs. 2,000 To D’s Capital A/c Rs. 30,000 (Amount brought in by D,

Premium for goodwill credited to existing partners’ capital accounts in profit sacrificing ratio)


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Example 2

A & B are equal partners. They wanted to take C as a third partner and for this purpose goodwill was valued at Rs. 1,20,000. The journal entry for adjustment of value of goodwill through partner’s capital accounts will be: C’s Capital A/c Dr. Rs. 40,000 To A’s Capital A/c Rs. 20,000 To B’s Capital A/c Rs. 20,000 (Adjustment for goodwill)


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Continued

The net effect in partner capital accounts is shown on the basis of profit sacrificing ratio: A = 1/6 x Rs. 1,20,000 = Rs. 20,000 (Cr.) B = 1/6 x Rs. 1,20,000 = Rs. 20,000 (Cr.) C = 1/3 x Rs. 1,20,000 = Rs. 40,000 (Dr.)


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Example 3

A & B are equal partners. They wanted to admit C as 1/6th partner who brought Rs. 60,000 as goodwill. The new profit sharing ratio is 3:2:1. Profit sacrificing ratio is to be computed as follows: Old share – New Share = Share Sacrificed A = 1/2 less 3/6 = 0 B = 1/2 less 2/6 = 1/6


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Continued

So the entire goodwill should be credited to B’s Capital A/c. Cash A/c Dr. Rs. 60,000 To B’s Capital A/c Rs. 60,000 (Goodwill brought in by C credited to B’s Capital A/c)


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Example 4

A, B & C are equal partners. They decided to take D who brought in Rs. 36,000 as goodwill. The new profit sharing ratio is 3:3:2:2. Old Share – New Share = Share Sacrificed A = 1/3 less 3/10 = 1/30 B = 1/3 less 3/10 = 1/30 C = 1/3 less 2/10 = 4/30


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Continued

So goodwill should be shared in the ratio 1:1:4 Cash A/c Dr. Rs. 36,000 To A’s Capital Account Rs. 6,000 To B’s Capital Account Rs. 6,000 To C’s Capital Account Rs. 24,000 (Goodwill brought in by

D credited to old partner’s accounts in their profit sacrificing ratio 1:1:4)


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Note:

Instead of adjusting the value of goodwill of the firm through partner’s capital accounts without raising goodwill account in the books, another practice is also followed. The practice is to first raise the goodwill account in the books by crediting the value of goodwill to existing partner’s capital accounts in old profit sharing ratio and then immediately writing off the value of goodwill by debiting all partner capital accounts in new profit sharing ratio.


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Illustration 3

A,B & C are equal partners. They wanted to change the profit sharing ratio into 4:3:2. They raised the goodwill Rs. 90,000 but they want to immediately write it off. Make the necessary journal entries.


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Solution

Journal Entry Rs. Rs. A’s Capital Dr. 10,000 To C’s Capital A/c 10,000 In this case due to change in profit sharing ratio


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Continued

A’s gain is = 4/9 less 1/3 = 1/9 B’s gain is = 1/3 less 1/3 = 0 C’s loss is = 1/3 less 2/9 = 1/9 So, A should compensate C to the extent of 1/9th of goodwill i.e. Rs. 90,000 x 1/9 = Rs. 10,000


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Illustration 4

Wise, Clever and Dull were trading in partnership sharing profits and losses 4:3:3 respectively. The accounts of the firm are made upto 31st December every year. The partnership provided, inter alia, that: On the death of a partner the goodwill was to be valued at three years’ purchase of average profits of the three years upto the date of the


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Continued

Death after deducting interest @ 8 per cent on capital employed and a fair remuneration of each partner. The profits are assumed to be earned evenly throughout the year. On 30th June, 2005, Wise died and it was agreed on his death to adjust goodwill in the capital accounts without showing any amount of goodwill in the Balance Sheet.


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Continued

It was agreed for the purpose of valuation of goodwill that the fair remuneration for work done by each partner would be Rs. 15,000 per annum and that the capital employed would be Rs. 1,56,000. Clever and Dull were to continue the partnership, sharing profits and losses equally after the death of Wise. The following were the amounts of profits of earlier years before charging interest on capital employed.


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Continued

Rs. 2002 67,200 2003 75,600 2004 72,000 2005 62,400 You are requested to compute the value of goodwill and show the adjustment thereof in the books of the firm.


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Solution

Computation of the value of goodwill: (i) Average Profit for three years, ending 30th

June; before death: Year ending 30th June, 2003: Rs. Rs. 1/2 of 2002 profits 33,600 1/2 of 2003 profits 37,800 71,400


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Continued Year ending 30th June, 2004: 1/2 of 2003 37,800 1/2 of 2004 Profits 36,000 73,800 Year ending 30th June, 2005: 1/2 of 2004 36,000 1/2 of 2005 Profits 31,200 67,200 Total 2,12,400 Average 70,800


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Continued

(ii) Super Profit: Average profit earned 70,800 Less: Partner’s remuneration 45,000 Less: 8% on capital

employed 12,480 57,480 Super Profits: 13,320


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Continued (iii) Goodwill @ three years’ purchase Adjustment entries for Goodwill

Journal Dr. Cr. Rs. Rs. Clever’s Capital Account Dr. 7,992 Dull’s Capital Account Dr. 7,992 To Wise’s Capital Account 15,984


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Continued (Adjusting entry passed for share of goodwill of wise through remaining partners’ capital account in gaining ratio) Working Note: Partner New Share Old Share Difference

Wise Clever Dull

-

½

½

- - -

4 10 3

10 3

10

=

=

=

4 10 2

10 2

10


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MULTIPLE CHOICE QUESTIONS

On GOODWILL


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MCQ 1

1. The profits of last five years are Rs. 85,000; Rs. 90,000; Rs. 70,000; Rs. 1,00,000 and Rs. 80,000. Find the value of goodwill, if it is calculated on average profits of last five years on the basis of 3 years of purchase.

(a) Rs. 85,000 (b) Rs. 2,55,000 (c) Rs. 2,75,000 (d) Rs. 2,85,000


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MCQ 2

2. The profits of last three years are Rs. 42,000; Rs. 39,000 and Rs. 45,000. Find out the goodwill of two years purchase.

(a) Rs. 42,000 (b) Rs. 84,000 (c) Rs. 1,26,000 (d) Rs. 36,000


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MCQ 3 3. The capital of A and B sharing profits and losses

equally are Rs. 90,000 and Rs. 30,000 respectively. They value the goodwill of the firm at Rs. 84,000, which was not recorded in the books. If goodwill is be raised now, by what amount each partner’s capital account will be debited:

(a) Rs. 21,000 and Rs. 63,000. (b) Rs. 42,000 and Rs. 42,000. (c) Rs. 63,000 and Rs. 21,000. (d) Rs. None of the above.


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MCQ 4

4. Find the goodwill of the firm using capitalization method from the following information: Total Capital Employed in the firm Rs. 8,00,000

Reasonable Rate of Return 15% Profits for the year Rs. 12,00,000 (a) Rs. 82,00,000 (b) Rs. 12,00,000 (c) Rs. 72,00,000 (d) Rs. 42,00,000


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MCQ 5

5. The capital of B and D are Rs. 90,000 and Rs. 30,000 respectively with the profit sharing ratio 3:1. The new ratio, admissible after 01.04.2006 is 5:3. Goodwill valued on 02.04.2006 as Rs. 84,000 will be credited to B and D’s capital by Rs………..and Rs…….

a. 63,000 and 21,000. b. 50,000 and 34,000. c. 52,500 and 31,500. d. 60,000 and 24,000.


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MCQ 6 6. The capital of B and D are Rs. 90,000 and Rs.

30,000 respectively with the profit sharing ratio 3:1. The new ratio, admissible after 01.04.2006 is 5:3. The goodwill is valued Rs. 80,000 as on that date. Amount payable by a gaining partner to a scarifying partner is:

(a) B will pay to D Rs. 10,000 (b) D will pay to B Rs. 10,000 (c) B will pay to D Rs. 80,000 (d) D will pay to B Rs. 80,000


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MCQ 7 7. A, B and C are equal partners. D is admitted to

the firm for one-fourth share. D brings Rs. 20,000 capital and Rs. 5,000 being half of the premium for goodwill. The value of goodwill of the firm is

(a) Rs. 10,000 (b) 40,000 (c) Rs. 20,000 (d) None of the above


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MCQ 8 8. The profits for 1998-99 are Rs. 2,000; for

1999-2000 is Rs. 26,100 and for 2000-01 is Rs. 31,200. Closing stock for 1999-2000 and 2000-01 includes the defective items of Rs. 2,200 and Rs. 6,200 respectively which were considered as having market value NIL. Calculate goodwill on average profit method.

(a) Rs. 23,700. (b) Rs. 17,700 (c) Rs. 13,700 (d) Rs. 17,300


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MCQ 9

9. A and B are partners with capitals of Rs. 10,000 and Rs. 20,000 respectively and sharing profits equally. They admitted C as their third partner with one-fourth profits of the firm on the payment of Rs. 12,000. The amount of hidden goodwill is

(a) 6,000 (b) 10,000 (c) 8,000 (d) None of the above


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MCQ 10

10. X and Y share profits and losses in the ratio of 2:1. They take Z as a partner and the new profit sharing ratio becomes 3:2:1. Z brings Rs. 4,500 as premium for goodwill. The full value of goodwill will be

(a) Rs. 4,500 (b) Rs. 18,000 (c) Rs. 27,000 (d) Rs. 24,000


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ADMISSION – Issues

• Ratios – Sacrificing and New ratio • Revaluation A/c • Accumulated Reserves and Surplus • Goodwill • Capital Adjustment


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Illustration 1

A and B are partners in a firm, sharing

profits and losses in the ratio of 3:2. The Balance Sheet of A and B as on 1.1.2006 was as follows:


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Liabilities Amount Rs Assets Rs Amount Sundry Creditors 12,900 Building 26,000 Bills Payable 4,100 Furniture 5,800 Bank overdraft 9,000 Stock-in-trade 21,400 Capital accounts: Debtors 35,000 A 44,000 Less Provision 200 34,800 B 36,000 80,000 Investment 2,500 Cash 15,500 1,06,000 1,06,000


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‘C’ was admitted to the firm of the above date on the following terms:

1. He is admitted for 1/6 share in the future profits and to introduce a capital of Rs 25,000.

2. The new profit sharing ratio of A,B and C will be 3:2:1 respectively.

3. ‘C’ is unable to bring in cash for his share of good will,


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partners therefore, decided to raise goodwill accounts in the books of the firm. They further decide to calculate goodwill on the basis of C’s share in the profits and the capital contribution made by him to the firm.

4. Furniture is to be written down by Rs 870 and stock to be depreciated by 5% .


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A provision is required for debtors @ 5% for bad debts. A provision would also be made for outstanding wages for Rs 1560. The Value of buildings having appreciated be brought upto Rs. 29,200. The value of investments is increased by Rs 450.

5. It is found that the creditors included a sum of Rs.1,400, which is not to be paid off prepare the following:

(i) Revaluation accounts. (ii) Partners’ capital accounts


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Solution Revolution Accounts Dr. Rs Cr. Rs To furniture 870 By building 3,200 To Stock 1,070 By Sundry Creditors 1,400 To Provision for Doubtful debts By Investment 450 (Rs1,750-Rs200)1,550 To Outstanding wages 1,560 5,050 5,050


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Partner Capital Accounts A Rs B Rs C Rs A Rs B Rs. C Rs

To balance b/d

71,000 71,000

54,000 54,000

25,000 25,000

By balance b/d By cash A/c By Goodwill A/c (Working note)

44,000 - 27,000 71,000

36,000 - 18,000 54,000

- 25,000 25,000 - 25,000


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Working Note

Calculation of goodwill:. C’s contribution of Rs. 25,000 consists of

only 1/6th of capital. Therefore, total capital of firm should be Rs. 25,000 x 6 =Rs 1,50,000 But combined capital of A,B,C amount Rs. 44,000 + 36,000 +25,000 = Rs1,05,000 Thus, the hidden goodwill is Rs 45,000 ( Rs. 150,000- Rs 1,05,000)


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Illustration 2 A and B are in the partnership sharing profits

and losses in the proportion of three-fourth and one—fourth respectively. Their balance sheet as on 31st March 2005 was as follows:

Cash Rs. 1,000; sundry debtors Rs. 25000; stock Rs 22,000: plant and machinery Rs 4,000; sundry creditors Rs 12,000; bank overdraft Rs 15,000; A’s capital Rs 15,000; B’s capital Rs 10,000.


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Continued

on 1st April, 2005, they admitted C into partnership on the following terms:

(i) C to purchase one-third of t he goodwill for Rs. 2,000 and provide Rs. 10,000 as capital Goodwill not to appear in books. (ii) Further profits and losses are to be shared by A,B and C equally.


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Continued

(iii) Plants and machinery is to be reduced by 10% and Rs 500 is to be provided for estimated bad debts. Stock is to be taken at a valuation of Rs. 24,940.

(iv) By bringing in or withdrawing cash and capitals of A and B are to e make proportionate to that of V on their profit- sharing basis.


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Solution

Dr (Rs) Cr. (Rs)

Revaluation Account Dr 900 To plant and machinery account 400 To Provision for bad debts accounts 500 (Plants & machinery reduced by 10% And Rs. 500 provided for bad debts)


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Stock Account Dr 2940 To Revaluation Accounts 2,940 (Value of stock increased by Rs.2940) Revaluation Account Dr 2,040 To A’s capital Account 1,530 To B’s capital Account 510 (Profit on revaluation transferred)


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Cash Account Dr 10,000 To C’s capital Account 10,000 (Cash brought in by C as his capital) Cash Account Dr 2,000 B’s capital Account Dr 500 To A’s capital Account 2,500 (Entry for goodwill purchased by B and C)


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A’s capital Account Dr. 9,030 B’s capital Account Dr. 10 To Cash Account 9,040 (Excess amount of capital withdrawn)


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A Rs B Rs C Rs

A Rs

B Rs

C Rs

To A’s capital

500 By Balance b/d

15,000 10,000 -

To Cash

9,030 10 By Revaluation A/c

1,530 510 -

To Balance b/d

10,000 19,030

10,000 10,510

10,000 10,000

By Cash By B’s capitals A/c

2,000 500 19,030

- 10,510

10,000 10,000


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Working Note

Calculation of goodwill C pays Rs. 2,000 on account of goodwill for

1/3rd share of profit/ loss. Total goodwill is Rs. 2,000 x 3 =Rs. 6,000.

Gaining ratio: B:1/3-1/4 = 1/12 C: 1/3


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Continued

Goodwill to be paid to A: By B Rs. 6,000 x 1/12 = Rs. 500. By C Rs. 6,000 x 1/3 = Rs 2,000 Total Rs. 2,500


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ADMISSION


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1. A and B are partners sharing profits and losses in the ratio 5:3. They admitted C and agreed to give him 3/10th of the profit. What is the new ratio after C’s admission?

a. 35:42:17. b. 35:21:24. c. 49:22:29. d. 34:20:12

MCQ 1


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MCQ 2

2 A and B are partners sharing profits in the ratio 5:3, they admitted C giving him 3/10th share of profit. If C acquires 1/5th share from A and 1/10th from B, new profit sharing ratio will be

a. 5:6:3. b. 2:4:6 c. 18:24:38 d. 17:11:12


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3 C was admitted in a firm with 1/4th share of the profit of the profits of the firm. C contributes Rs. 15,000 as his capital. A and B are other partners with the profit sharing ratio as 3:2. Find the required capital of A and B, if capital should be in profit sharing ratio taking C’s as base capital.

A. Rs. 27,000 and Rs 16,000 for A and B

respectively. B. Rs. 27,000 and Rs. 18,000 for A and B

respectively. C. Rs. 32,000 and Rs. 26,000 for A and B

respectively. D. Rs. 31,000 and Rs.26,000 for A and B

respectively.


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MCQ 4

4 A, B and C are partners sharing profits and losses in the ratio 6:3:3, they agreed to take D into partnership for 1/8th share of profits. Find the new profit sharing ratio.

a. 12;27:36:42 b. 14:7:7:4. c. 1:2:3:4. d. 7:5:3:1


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5 X and Y are partners sharing in the ratio 5:3. They admitted Z for 1/5th share of profits, for which he paid Rs. 1,20,000 against capital and Rs. 60,000 against goodwill. Find the capital balance for each partner taking Z’s capital as base capital.

a. 3,00,000; 1,20,000 and 1,20,000. b. 3,00,000; 1,20,000 and 1,80,000. c. 3,00,000; 1,80,000 and 1,20,000. d. 3,00,000; 1,80,000 and 1,80,000

MCQ 5


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6 A and B are partners sharing profits and losses in the ratio of 3:2 (A’s Capital is Rs. and B’s Capital is Rs 15,000). They admitted C agreed to give 1/5th share of profits to him. How much C should bring in towards his capital?

a. Rs. 9,000. b. Rs 12,000. c. Rs. 14,500. d. Rs. 11,250.

MCQ 6


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7 A and B are partners sharing the profit in the ratio of 3:2. They take C as the new partner, who bring in Rs. 25,000 against capital and Rs. 10,000 against goodwill. New profit sharing ratio is 1:1:1. In what ratio will this amount will be shared among the old partners A & B.

a. 8,000:2,000. b. 5,000:5,000. c. Old partners will not get any share in the

goodwill bought in by C. d. 6,000:4,000.


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8 A and B are partners sharing the profit in the ratio of 3:2. They take C as the new partner, who is supposed to bring Rs.25,000 against capital and Rs. 10,000 against goodwill. New profit sharing ratio is 1:1:1. C is able to bring Rs. 30,000 only. How this will be treated in the books of the firm.

a. A and B will share goodwill bought by C as 4,000:1,000.

b. Goodwill will be raised to Rs. 15,000 in old profit sharing ratio.

c. Both. d. None


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9 A and B are partners sharing the profit in the ratio of 3:2. They take C as the new partner, who is supposed to bring Rs. 25,000 against capital and Rs. 10,000 against goodwill. New profit sharing ratio is 1:1:1. C is able to bring only his share of capital. How this will be treated in the books of the firm.

a. A and B will share goodwill bought by C as 4,000:1,000.

b. Goodwill will be raised to Rs. 30,000 in old profit sharing ratio.

c. Both. d. None


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10. A and B are partners sharing the profit in the ratio of 3:2. They take C as the new partner, who is supposed to bring Rs 25,000 against capital and Rs. 10,000 against goodwill. New profit sharing ratio is 1:1:1. C bought cash for his share of Capital and agreed to compensate to A and B outside the firm. How this will be treated in the books of the firm

a. Cash bought in by C will only be credited to his capital account.

b. Goodwill will be raised to full value in old ratio. c. Goodwill will be raised to full value in new ratio. d. Cash bought by C will be credited to his account and

debited with his share of goodwill, which will be debited to A and B’s account in sacrificing ratio.


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PARTNERSHIP

RETIREMENT


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Illustration 1

F,G, and K were partners sharing profit and

losses at the 2:2:1. K wants to retire on 31.12.2005. Given below is the Balance Sheet of the partnership as well as other information:


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Balance sheet as on 31.12.2005 Liabilities Rs. Assets Rs.

Capital A/C’s F G K Reserve Sundry Creditors

1,20,000 80,000 60,000 10,000 50,000 3,20,000

Sundry Fix Assets Stock Debtors Bills Receivable Bank

1,50,000 50,000 50,000 20,000 50,000 3,20,000


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F and G agree to share profits and losses at the ratio at the

ratio of 3:2 in future. Value of Goodwill is taken to be Rs. 50,000. Sundry Fixed Assets are revalued upward by Rs. 30,000 and stock by Rs. 10,000. Bills Receivable dishonoured Rs. 5,000 on 31.12.2005 but not recorded in the books. Dishonour of bill was due to insolvency of the customer. F and G agree to bring sufficient cash to discharge claim of K and make their capital proportionate. Also they wanted to maintain Rs. 75,000 bank balance for working capital. However they did not want to show goodwill in the books of accounts. Pass necessary journal entries and draft the Balance Sheet of Ms/ F & G.


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Rs. Rs. (1) F’s Capital A/c Dr To K’s Capital A/c (Being the adjustment for goodwill on K’s Retirement)- Refer W.N (2) Reserve A/c Dr To F’s Capital A/c To G’s Capital A/c To K’s Capital A/c (Transfer of Reserve to Partners’ Capital A/cs on K’s retirement)

10,000 10,000

10,000 4,000 4,000 2,000


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Rs. Rs. (3) Sundry Fixed Assets A/c Dr. Stock A/c Dr. To Profit and Loss Adjustment A/c (Increase in the value of Sundry Fixed

Assets and Stock recorded) (4) Profit and Loss Adjustment A/c Dr. To Bills Receivable A/c (Loss arising out of dishonoured bill

recorded)

30,000 10,000 5,000

40,000 5,000


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Rs. Rs. (5) Profit and Loss Adjustment A/c

Dr To F’s Capital A/c To G’s Capital A/c To K’s Capital A/c (Profit on revaluation transferred to

Partners’ Capital A/cs on K’s retirement)

35,000

14,000 14,000 7,000


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Rs. Rs. (6) Bank A/c Dr To F’s Capital A/c To G’s Capital A/c (Cash brought in by F and G

as per agreement)

1,04,000

70,000 34,000


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Rs. Rs. (7) K’s Capital A/c Dr. To Bank A/c (Payment made to K on

retirement)

79,000

79,000


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Working Note: Adjusting entry for goodwill

Partner Old Share New Share Gain Sacrifice F G K

2 5 2 5 1 5

3 5 2 5 -

1 5 - -

- - 1 5


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Continued

Adjusting entry: F’s Capital A/c (50,000x 1/5) Dr 10,000 To K’s Capital A/c 10,000


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Illustration 2

Dowell & co. is a partnership firm with

partners Mr. A, Mr. B and Mr. C, sharing profits and loss in the ratio of 10:6:4. The balance sheet of the firm as at 31st March, 2006 is as under.


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Rs. Rs. Capital Mr. A 80,000 Mr. B 20,000 Mr. C 30,000 Reserves (unappropriated profit) Long Term Debt Bank Overdraft Trade Creditors

1,30,000 20,000 3,00,000 44,000 1,70,000

6,64,000

Land Buildings Plant and machinery Furniture Investments Stock Debtors

10,000 2,00,000 1,30,000 43,000 12,000 1,30,000 1,39,000 6,64,000


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Continued

It was mutually agreed that Mr. B will retire from partnership and in his place Mr. D will be admitted as a partner with effect from 1st April, 2006. For this purpose, the following adjustments are to be made.

(a) Goodwill is to be valued at Rs. 1 lakh but the same will not appear as an asset in the books of the reconstituted firm.


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(b) Building and plant and machinery are to be depreciated by 5% and 20% respectively. Investments are to be taken over by the retiring partner at Rs. 15,000. Provision of 20% is to be made on debtors to cover doubtful debts.

(c) In the reconstituted firm, the total capital will be Rs. 2 lakhs which will be contributed by Mr. A, Mr. C and Mr. D in their new profit sharing ratio, which is 2:2:1


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a. The surplus funds, if any, will be used for repaying bank overdraft.

b. The amount due to retiring partner shall be transferred to his loan account.

(a) Revaluation account; (b) Partners’ capital accounts; (c) Bank account; and (d) Balance sheet of the reconstituted firm as

on 1st April, 2006.


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Dr. Rs. Cr. Rs.

To Building A/c To Plant and Machinery A/c To Provision for Doubtful Debts A/c

10,000 26,000 27,800 63,800

By investment A/c By Loss to partners: A 30,400 B 18,240 C 12,160

3,000 60,800 63,800

Revaluation Account Solution


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A’s Capital Dr Rs Cr Rs

To Revaluation A/c To Balance c/d

30,400 80,000 1,10,400

By Balance b/d By Reserves A/c By C and D’s Capital A/c By Bank A/c (balancing figure)

80,000 10,000 10,000 10,400 1,10,400


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B’s Capitals Dr Rs Cr Rs

To Revaluation A/c To Investments c/d By B’s Loan A/c

18,240 15,000 22,760 56,000

By Balance b/d By Reserves A/c By C and D’s Capital A/c

20,000 6,000 30,000 56,000


96

C’s Capital Account Dr Rs Cr Rs

To Revaluation A/c To A and B’s Capital A/c To Balance c/d

12,160 20,000 80,000 1,12,160

By Balance b/d By Reserves A/c By Bank A/c (balancing figure)

30,000 4,000 78,160 1,12,160


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D’s Capital Account Dr Rs Cr Rs

To A and B’s Capital A/cs To Balance c/d

20,000 40,000 60,000

By Bank A/c 60,000 60,000


98


RETIREMENT


99

1. Retiring or outgoing partner: a. To be liable for firm’s liabilities. b. Not liable for any liabilities of the firm. c. Is liable for obligation incurred before his retirement. d. Is liable for obligation incurred with his consent only.

MCQ 1


100

MCQ 2

2. A, B and C are partners with profits sharing ratio 4:3:2. b retires and Goodwill Rs. 10,800 shown in books of account. If A & C share profits of B in 5:3, then find the new profit sharing ratio.

a. 13:11. b. 17:11. c. 31:11. d. 14:21.


101

MCQ 3 3. A, B and C are partners with profits sharing

ratio 4:3:2. b retires and Goodwill Rs. 10,800 was shown in books of account. If A & C shares profits of B in 5:3, then find the value of goodwill shared between A and C.

a. Rs. 1,850 and Rs. 1,950. b. Rs. 1,650 and Rs. 1,750. c. Rs. 2,000 and Rs. 1,600. d. Rs. 1,950 and Rs. 1,650.


102

MCQ 4 4. C, D and E are partners sharing profits and

losses in the proportion of ½ , 1/3 and 1/6. D retired and the new profit sharing ratio between C and E is 3:2 and the Reserve of Rs. 12,000 is divided amount the partners in the ratio.

a. 2000:4000:6000. b. 5000:5000:2000. c. 4000:6000:2000. d. 6000:4000:2000


103

MCQ 5

5. The capitals of A, B and C are Rs. 1,00,000; Rs. 75,000 and 50,000, profits are shared in the ratio of 3:2:1. B retires on the basis that his shares is purchased by other partners keeping the total capital intact. The new ratio between A and C is 3:1. Find the capital of A and C after purchasing B’s share.

a. Rs. 1,50,000 and Rs. 1,00,000. b. Rs. 1,46,250 and Rs.42,000. c. Rs. 1,56,250 and Rs. 68,750 d. Rs. 86,250 and Rs. 46,250


104

MCQ 6 6. Outgoing partner is compensated for parting

with firm’s future profits in favour of remaining partners. In what ratio do the remaining partners contribute to such compensation amount?

a. Gaining Ratio. b. Capital Ratio. c. Sacrificing Ratio. d. Profit Sharing Ratio


105

MCQ 7

7. Joint Life Policy is taken by the firm on the life(s) of ………

a. All the partners jointly. b. All the Partners severely. c. On the life of all the partners and employees of the firm. d. ‘a’ and ‘b”


106

MCQ 8 8. At the time of retirement of partner, firm

gets…….from the insurance company against the joint Life Policy taken jointly for all the partners.

a. Policy Amount . b. Surrender Value c. Policy Value for the retiring partner and Surrender Value for the rest. d.Surrender Value for all the partners.


107

MCQ 9

9. At the time of retirement of partner, firm gets….. from the insurance company against the joint Life Policy taken severely for each partner.

a. Policy Amount . b. Surrender Value c. Policy Value for the retiring partner and Surrender Value for the rest. d. Surrender Value for all the partners


108

10. A, B and C takes a Joint Life Policy, after five

years B retires from the firm. Old profit sharing ratio is 2:2:1. After retirement A and C decides to share profits equally. They had taken a Joint Life Policy of Rs. 2,50,000 with the surrender value Rs. 50,000. What will be the treatment in the partner’s capital account on receiving the JLP amount if joint life premium is fully charged to revenue as and when paid?

MCQ 10


109

Continued

a. Rs. 50,000 credited to all the partners in old ratio.

b. Rs. 2,50,000 credited to all the partners in old ratio.

c. Rs. 2,00,000 credited to all the partners in old ratio.

d. No treatment is required


110

PARTNERSHIP

DEATH


111

Illustration 1

The following was the Balance sheet of Om

and Co. in which X,Y,Z were partners sharing profits and losses in the ratio of 1:2:2 as on 31.3.2005. Mr Z died on 31st December, 2005. His account has to be settled under the following terms


112

Balance Sheet of Om & Co. as on 31.03.205

Liabilities Rs Rs Assets Rs

Sundry creditors Bank Loan General Reserve Capital Accounts; X 40,000 Y 80,000 Z 80,000

20,000 50,000 30,000 2,00,000 3,00,000

Goodwill Building Computers Stock Sundry debtors Cash at bank Investments

30,000 1,20,000 80,000 20,000 20,000 20,000 10,000 3,00,000


113

Goodwill is to be calculated at the rate of tow years purchase on the basis of average of three years’ profits and losses. The profits and losses for the three years were as detailed below:

Year ending on Profit/ Loss 31.3.2005 30,000 31.3.2004 20,000 31.3.2003 (10,000) Loss


114

Profit for the period from 1.4.2005 to 31.12.2005 shall be ascertained proportionately on the basis of average profits and losses of the preceding three years.

During the year ending on 31.3.2005 a car costing Rs. 40,000 was purchased on 1.4.2004 and debited to traveling expenses account on which depreciation is to be calculated at 20& p.a. This asset is to be brought into account at the depreciated value.


115

Other value of assets were agreed ad follows: Stock at Rs. 16,000, building at Rs. 1,40,000, computers at Rs. 50,000; investments at Rs. 6,000. Sundry debtors were considered good.

Your are required to: (i) Calculate goodwill and Z’s share in the profits of

the firm for the period 1.4.2005 to 31.12.2005. (ii) Prepare revaluation account assuming that other

items of assets and liabilities remained the same.


116

Solution (i) Calculation of goodwill and Z’s share of profit

(a) Adjust profit for the year ended 31.3.2005:

Rs Rs

Profit (Given) Add: Cost of car wrongly written off Less: Depreciation for the Year 2004-05 (20% on Rs. 40,000)

40,000 8,000

30,000 32,000 62,000


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(b) Average of last three years profits and losses

Rs

Years ended on 31.3.2003 31.3.2004 31.3.2005 Average profit (72,000/3)

Profit/(Loss) Rs. (10,000) 20,000 62,000 72,000 24,000


118

(c) Goodwill at 2 years’ purchase Rs. 24,000 x 2 = Rs. 48,000 (d) Z’s share of profits from the period 1.4.2005 to 31.12.2005 Rs. 24,000 x 9/12 x 2/5 = Rs.7,200


119

(ii) Revaluation Accounts Dr. Rs. Cr. Rs.

To stock account To Computer account To Investments account

4,000 30,000 4,000 38,000

By Building Account By Loss transferred to X 3,600 Y 7,200 Z 7,200

20,000 18,000 38,000


120

On the basis of illustration 1, prepare

partners capital accounts and balance sheet of the firm Om and Co. ad on 31.12.2005.

Solution Partners’ Capital Accounts

Illustration 2


121

Dr X Rs. Y Rs. Z Rs. X Rs. Y Rs

Cr Z Rs.

To Revaluation A/c To Z’s Executor’s To G/w A/c

3,600 6,000

7,200 12,000

7,200 1,12,000 12,000 -

By Bal. b/d By Gen. reserve By X and Y

40,000 6,000

80,000 12,000 -

80,000 12,000 19,200


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Dr X Rs. Y Rs. Z Rs. X Rs. Y Rs

Cr Z Rs.

To Z To Balance c/d

6,400 36,400 52,400

12800 72,800 1,04,800

1,31,200

By Car A/c By Profit and loss suspense A/c

6,400 52,400

12,800 1,04,800

12,800 7,200 1,31,200


123

Liabilities Rs. Assets Rs

Sundry creditors Bank Loan Capital accounts: X Y Z’s Executor’s accounts

20,000 50,000 36,400 72,800 1,12,000 2,91,200

Building Car Stock Computers Investments Sundry debtors Cash at bank Profit and Loss suspense Accounts

1,40,000 32,000 16,000 50,000 6,000 20,000 20,000 7,200 2,91,200

Balance Sheet of Om & Co. as 31.12.2005


124

Goodwill calculated at the time of death of partner Z ( See W .N. c of solution 2)

Partner Old Share New Share Gain Sacrifice X Y Z

1 5 2 5 2 5

1 3 2 3 -

2 15 5 15 -

- - 2 5


125

Adjusting entry X’s Capital Dr 6,400 Y’s Capital Dr. 12,800 To Z’s Capital Account 19,200 (Adjustment for goodwill on the death of Z on the basis of gaining ratio)


126


DEATH


127

1. On death of partner, his executor is paid the

share of profits of the dying partner for the relevant period. This payment is recoded in Profit & loss…… Account.

a. Adjustment. b. Appropriation. c. Suspense d. Reserve.


128

2. Revaluation account is prepared at the time of

a. Admission of partner b. Retirement of a partner c. Death of a partner d. All of the above


129

3. In the absence of proper agreement, representative of the deceased partner is entitled to the Dead partner’s share in the following items.

a. Profits till date, goodwill, joint life policy, interest on capital, share in revalued assets and liabilities

b. Capital, goodwill, joint life policy, interest on capital, share in revalued assets and liabilities.


130

c. Capital, Profits till date, goodwill, interest on capital, share in revalued assets and liabilities.

d. Capital, profits till date, goodwill, joint life policy, share in revalued assets and liabilities.


131

4. As per Section 37 of the Indian Partnership Act, 1932, the executors would be entitled at their choice to the interest calculated from the date of death till the date of payment on the final amount due to the dead partner at……… percentage per annum.

a. 7. b. 4. c. 6. d. 12


132

5. A,B and C are the partners sharing profits and losses in the ratio 2:1:1. Firm has a joint life policy of Rs. 1,20,000 and in the balance sheet it is appearing at the surrender value i.e. Rs 20,000. On the death of A, how this JLP will be shared among the partners.

a. 50,000:25,000:25,000 b. 60,000:30,000:30,000 c. 40,000:35,000:25,000 d. Whole of Rs. 1,20,000 will be paid to A

THE END

Partnership Accounts

Documents

Partnership Accounts - jandkicai.orgPartnership Accounts 2 Goodwill Computation and Accounting . METHOD FOR GOODWILL VALUATION . There are four methods for valuation of goodwill